In this article we dissect the main differences between taking an passive versus active investment strategy. Either taking an active approach to your investments or more of a laissez-faire approach.
Active
Advantages
With an active investment style you actively seek out new opportunities, which you attempt to benefit from, leading to a potentially higher return in the short term. The goal is to repeat this over and over again, resulting in a higher return, in the longer term also. Besides having a lot of small profits, you are rarely so invested in something that you become reluctant to sell; so some spare cash can always be arranged, if needed.
Disadvantages
It does require one to stay on top of things and well informed at all times, lest you either miss an opportunity or a disaster for you portfolio. The primary problem with active, is buying/selling to soon, or trading to much; you try to take advantage of every opportunity, to the point of losing sight of the bigger picture. It is possible to buy funds which trade actively, the managers of these do have a full workday to monitor the market, thereby reducing the risk of missing out, paying for them does have its costs. Also keeping track of all costs and transactions is some extra work.
For after some time: larger transaction can be tricky, as amount limits per transaction can apply. These can usually be raised, which requires a bit of paper work and several hours of waiting time every time you want to make an investment.
Passive
Advantages
A simple technique of picking and buying stock, which you then either sell after some time, or when a goal has been reached. There is a lot of work before you buy, as picking the right investment for multiple months can be rather tricky. You could also buy a highly regarded fund, which is simpler and presumably leads to the same result: It is the reason of existence of most fund to mimic or slightly outperform the market in general, you they are a relatively safe bet for the mid-term.
Simply buying when you receive your income, is considered to be one of the best way to slowly, but surely, builds some wealth. This does allow for a slightly early retirement or a big plan to work towards.
Disadvantages
You will likely miss out on buying when it is cheap and selling when most profitable. Naturally, it is possible to do so anyhow, but that would lean towards an active style. There also is a possible agent problem; someone managing the fund, who does not update or rebalance: Every once in a while some selling and buying, possible replacing, has to take place to maintain the intended allocation, or change which assets are bought (this is needed with passive, just to avoid sitting on something outdated).
Staying put for an extended period of time without ever checking if it is still any good, does create the risk of utilising something that suddenly disappears: There actually is a precedent for people showing up years after depositing something, without ever checking in, and finding their possessions gone.
Effect of dividends
The main difference between both stratagems is that an active take generally results in less dividends, since you are unlikely to hold them at precisely ex-dividend date. However, it is possible to actively buy shares before the cut-off date, in which case you will receive many dividends, several per month is fully feasible. Please note that ex-dividend means that you pay including the full dividend amount (including taxes), so you would presumably sell at a lower price but with the dividend. This may not always result in a profit. In fact, if a sufficient amount of other traders pursue the same strategy, the selling price will be considerably lower.
Effect of costs
It heavily depends on your trading platform* and specific activity, but generally active has a higher cost: Transaction costs will have to be paid every time, some exchanges also charge stamp tax.
Fees for simple basic holding of shares with only a monthly rebalancing, or investing of income, tend to be lower. Just remember to keep enough cash allotted in your account, as overdraft fees can get above 10%.
Notes
The main objective here is to invest in a manner that feels good to you; anything is better than just spending money, or parking in a account that yields interest below inflation. Comparing costs and previous results is a good way to get started, once you found what you want to invest in. This article has assumed that you trade on a exchange, with a platform, which is not a hard requirement for either approach; buying and selling items which you physically hold can be done just the same.
*Some do not charge transaction fees, or storage fees, below a threshold, naturally everyone pays in the end. Do I need to remind anyone that there is no such thing as a free lunch?
